Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) represents all direct costs incurred to produce your product or deliver your service. It is a critical component of unit economics because it directly affects your gross margin and profitability per unit.

🧩 What is COGS?

COGS includes all expenses directly tied to creating or delivering a unit of your product or service:

Materials and components
Manufacturing or production costs
Direct labor (production staff)
Packaging
Shipping or delivery costs directly associated with the product

🧠 Why COGS Matters (Especially for Startups)

Knowing COGS helps founders answer:

How much does it really cost to produce one unit?
Are our prices covering production costs?
What is our gross margin per unit?
Which products or services are profitable?

Ignoring COGS leads to overestimating profits and poor pricing or scaling decisions.

📘 How to Calculate COGS

Step-by-step:

List all direct costs per unit: materials, production labor, packaging, direct delivery.
Sum total costs: calculate cost per unit or for a batch of units.
Exclude indirect costs: do not include rent, salaries of non-production staff, or marketing baseline (these are OPEX).
Analyze for unit economics: COGS per unit = Total direct costs ÷ Number of units produced.

💡 Common Mistakes Founders Make

Mixing indirect expenses (OPEX) with COGS
Ignoring labor costs for production
Forgetting packaging or shipping costs per unit
Failing to update COGS as suppliers or production processes change

⭐ Practical Examples

Example 1: E-commerce Product
Material = $10
Production labor = $5
Packaging = $2
Direct shipping = $3
COGS per unit = $20

Example 2: SaaS Startup (Digital Product)
Server cost per user = $2
Software license per user = $1
Support cost per user = $1
COGS per unit = $4 per user per month

🎯 Startup Rule (Remember This)

Always calculate COGS per unit accurately — it is the foundation for pricing, gross margin, and profitability analysis.